New Powers, New Scotland? How the Scottish Parliament Could Use Its New Tax and Benefit Responsibilities
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REPORT NEW POWERS, NEW SCOTLAND? HOW THE SCOTTISH PARLIAMENT COULD USE ITS NEW TAX AND BENEFIT RESPONSIBILITIES Spencer Thompson and Russell Gunson March 2016 © IPPR Scotland 2016 Institute for Public Policy Research ABOUT IPPR SCOTLAND IPPR Scotland is IPPR’s dedicated cross-party progressive thinktank for Scotland, based in Edinburgh. Our research, together with our stimulating and varied events programme, seeks to produce innovative policy ideas for a fair, democratic and sustainable Scotland. Our aim is to stimulate and engage in widespread dialogue on the issues that really matter for Scotland’s social, economic and political future. All of our work is guided by the goals of social justice, democracy and sustainability. IPPR Scotland Hayweight House 23 Lauriston St Edinburgh EH3 9DQ T: +44 (0)131 281 0886 www.ippr.org/scotland Registered charity no. 800065 This paper was first published in March 2016. © 2016 The contents and opinions expressed in this paper are those of the authors only. NEW IDEAS for CHANGE CONTENTS Summary ............................................................................................................3 1. Introduction ....................................................................................................5 2. Tax and benefit powers in Scotland ...............................................................7 2.1 Current powers ................................................................................................ 7 2.2 Powers from 2016 ........................................................................................... 8 2.3 New Scotland bill powers................................................................................. 8 2.4 General principles and the fiscal framework.................................................... 11 3.Tax and benefit pressures in Scotland ..........................................................13 3.1 The UK government’s tax and welfare programme ......................................... 13 3.2 Impact on Scottish households ...................................................................... 14 3.3 UK Conservative manifesto tax commitments ................................................ 15 3.4 Challenges of fluctuations in revenue in Scotland ........................................... 16 3.5 Fiscal challenges facing Scotland ................................................................... 18 4. The fiscal and distributional impact of Scotland’s tax and benefit powers . 21 4.1 Income tax ..................................................................................................... 22 4.2 Council tax .................................................................................................... 28 4.3 Benefits ......................................................................................................... 29 4.4 Conclusion .................................................................................................... 32 5. Conclusion....................................................................................................33 References .......................................................................................................34 Annex: Data tables ...........................................................................................36 1 IPPR Scotland | New powers, new Scotland? How the Scottish parliament could use its new tax and benefit responsibilities ABOUT THE AUTHORS Spencer Thompson is senior economic analyst at IPPR. Russell Gunson is director of IPPR Scotland. ACKNOWLEDGMENTS The authors would like to thank Chris Goulden and Jim McCormick at the Joseph Rowntree Foundation for their comments and advice; our IPPR colleagues Josh Goodman and Ed Cox for their input on the paper; and Ashwin Kumar of Liverpool Economics for his input in developing the IPPR Scotland tax-benefit model. This project was generously supported by the Joseph Rowntree Foundation. Download This document is available to download as a free PDF and in other formats at: http://www.ippr.org/publications/new-powers-new-scotland Citation If you are using this document in your own writing, our preferred citation is: Thompson S and Gunson R (2016) New powers, new Scotland? How the Scottish parliament could use its new tax and benefit responsibilities, IPPR Scotland. http://www.ippr.org/publications/ new-powers-new-scotland Permission to share This document is published under a creative commons licence: Attribution-NonCommercial-NoDerivs 2.0 UK http://creativecommons.org/licenses/by-nc-nd/2.0/uk/ For commercial use, please contact [email protected] 2 IPPR Scotland | New powers, new Scotland? How the Scottish parliament could use its new tax and benefit responsibilities SUMMARY Scotland is increasingly taking on more powers and responsibilities over devolved income tax and benefits. Following the successful passage of the Scotland bill, it is estimated that these powers will mean that Scotland will have control over revenue totalling almost half of devolved expenditure by the Scottish government and Scottish local authorities, and 15 per cent of Scottish benefit spending. This development prompts two core questions. First, what will be the likely impact of the Scottish government using its new powers to offset short-term challenges that are expected to reduce Scottish household incomes and lead to a deterioration in the Scottish fiscal position? And second, over the medium and long term what is the likelihood of the Scottish government developing its own distinctive tax and benefit system? On tax, the Scottish government’s new powers over income tax offer significant flexibility to reduce or increase tax paid on earnings by Scottish households, particularly those further up the distribution. On benefits, while coverage of devolved disability benefits is low, changes to the level of these benefits can have a significant impact on a claimant’s living standards. Effect of tax-benefit changes in Scotland Scotland faces a series of short and medium-term challenges. • Welfare cuts planned at a UK level will see benefit spending in Scotland fall by £600 million a year by 2020/21. • These cuts will vastly outweigh the benefit from the new national living wage for the poorest households in Scotland. Among the 700,000 Scottish households who will be negatively affected by the changes, losses will average £730 per year. • Planned UK government income tax cuts will reduce tax revenues in Scotland by £600 million a year by 2020/21 if matched in Scotland, comprising £300 million lost due to an increase in the personal allowance, over which the Scottish government will have no control, and a further £300 million lost if Scotland matches UK government increases in the higher rate threshold. If operating as intended, the fiscal framework should insulate the Scottish budget from reductions in tax revenue from reserved decisions (such as increased personal allowance). • If implemented in full in Scotland, these tax cuts would benefit Scottish households, but the biggest winners will be those at the top of the earnings distribution, who will on average gain £590 a year. • Devolved spending will be reduced further over the coming years as a result of UK-wide spending decisions. The Scottish block grant, under current arrangements, is expected to see reductions in total departmental spending of 4.2 per cent, or £1.2 billion, in real terms between 2015/16 and 2019/20. • The projected reduction in Scotland’s working-age population could see a £300 million decrease in Scottish tax revenues when compared to projected working-age population growth across the UK as a whole. The fiscal framework, agreed through to 2022, should insulate the Scottish budget from changes in population, if it operates as intended. 3 IPPR Scotland | New powers, new Scotland? How the Scottish parliament could use its new tax and benefit responsibilities Options for the Scottish parliament Given these pressures on Scotland’s public finances and households, how could the Scottish parliament’s new powers (and some existing powers) over taxes and benefits be used: 1) to reduce or eliminate the impact of cuts to the Scottish parliament’s block grant; 2) to mitigate or reverse cuts to benefits in Scotland; and 3) to reshape Scotland’s tax system. The fiscal effects of using the Scottish parliament’s powers are as follows. • Varying the basic rate alone (a 1p change) would see revenue grow/fall by £400 million by 2020/21. Varying the higher rate alone would see revenue grow/fall by £100 million (an increase of 1p in the higher rate) per year in 2020/21. Varying the basic, higher and additional rates of tax by 1p in the pound would see revenue grow/fall by £500 million annually by 2020/21. • Freezing the higher rate threshold in cash terms would raise revenue by £300 million per year by 2020/21. Increasing the higher rate threshold by CPI inflation would raise £100 million by 2020/21, relative to a business- as-usual case of inflation-indexation of the basic rate limit. • Increasing taxes on the highest earners by reducing the additional rate threshold in Scotland from £150,000 per year, would raise around £8.5 million per year for a £10,000 reduction. • Increasing the current rates of council tax could increase revenues to Scottish local government by £100 million (if increased in line with inflation – a real-terms freeze) or £200 million (if increased in line with average earnings) per year in 2020/21, relative to continuing the Scotland council tax cash-terms freeze.